Sino-Indian Sub-National Economic Ties: Changing the Game

With a still young political leadership in both China and India, economic ties will be a major plank of the India-China relationship. Even as the burgeoning trade deficit for India is a major bilateral problem, the two countries are also trying to lay fresh sinews in their relationship through Chinese-assisted infrastructure development in India. What is also important to note that is that much of these economic interactions are or will be increasingly negotiated at the sub-national level.

The requirement for infrastructure financing in India has come to a point where New Delhi has to set aside many of its older aversions to Chinese involvement in any form. While Chinese labour is still restricted, there is considerably more enthusiasm for Chinese capital. In the last few years especially, big Indian corporate majors have become quite familiar with easy Chinese financing terms.

In the Chinese blitzkrieg of infrastructure construction around the world, it is also important not to forget that Chinese capital is quite desperate for an outlet from a domestic market where overheating of the economy, overcapacity and the desire to transform the structure of the economy to a more balanced and equitable growth model mean that domestic investment options are limited or offer far lower returns than Chinese enterprises have become used to.

It is in this context, that the Bangladesh-China-India-Myanmar Economic Corridor (BCIM-EC) idea espoused by the new Chinese leadership comes into the picture as a potential project for Chinese infrastructure financing. Not only is it an India-involved policy of alternative Chinese routes to the warm waters of the Indian Ocean, it can also be interpreted in some ways as a carefully designed counter-/anti-Japanese strategy. For one, the BCIM-EC in India’s Northeast and East stands in contrast to the Japanese-supported Delhi-Mumbai Industrial Corridor. For another, the desire to re-open the Stilwell Road can be interpreted as a reminder of the Road’s original history as an axis created solely to supply the besieged Chinese government at Chongqing during World War II.

Next, the ‘Chinese’ interest in India needs to be disaggregated into that originating from the central government and the interest of the provincial governments. While the BCIM-EC is a project favoured by the central government in Beijing, it is the southwestern Chinese province of Yunnan that has traditionally been at the forefront of opening up to South Asia. The BCIM idea originated from Yunnan and was initially called the Kunming Initiative after the province’s capital. Indeed, several linkages have been built up between Kunming and Kolkata since the latter is the most economic developed of India’s regions nearest to Kunming. Yunnan’s many universities and think-tanks also devote substantial research to Indian and South Asian issues and Kunming is the host of many China-South Asia forums – business, think-tanks, etc. The “blue book” on India that grabbed headlines in India last year and which was mistakenly attributed to the central government in Beijing or to the Chinese Academy of Social Sciences was in fact brought out by the Yunnan University of Finance and Economics, Kunming, a provincial entity.

Indian states and Chinese provinces are the target

At the same time, there are other Chinese provinces that are competing for Indian attention as well as Chinese central government funding for research on and outreach to India. One such is Sichuan in central China, one of the country’s largest provinces in terms of population and also a politically powerful constituent in the Chinese political system. Chengdu, the capital is home to the Institute of South Asian Studies under Sichuan University, one of the oldest research centres in China devoted to South Asia and one which perhaps because of this reason, also hews more closely to traditional Chinese formulations of India, Indo-Pak relations, etc. Provincial governors and Party Secretaries and other officials from different parts of China have been frequent visitors to India in their own right over the past few years – both Xi Jinping and Yu Zhengsheng, the current No.4 in the Politburo Standing Committee, have met with Indian leaders during their terms as provincial Party secretaries.

India – New Delhi and the state governments – too, has begun to take a sub-national approach towards China. New Delhi some years ago invited the Governor of Xinjiang as part of the MEA’s Distinguished Visitor’s Programme. Meanwhile, Indian state Chief Ministers from Gujarat, Assam, Bihar, Delhi and Karnataka among others have all either visited China and/or hosted Chinese delegations in recent years.

The growing number of exchanges between Indian and Chinese sub-national actors is dominated by trade and commercial interests. One can be certain that China’s recent offer to finance up to 30 per cent of India’s physical infrastructure investment requirements for 2012-17 will also target the state level in India and involve not just Chinese central government State-Owned Enterprises (SOEs) but also provincial SOEs.

The implications for India are several. New Delhi will clearly not be able to regulate or manage such substantial inflows from China without greater cooperation with its own state governments. It will have to devolve a greater degree of authority in foreign economic policymaking and political interactions to the states than has hitherto been the case. For now even the sister city arrangements between Indian and Chinese cities are negotiated by the MEA but such arrangements will need to rise exponentially if they are to have substantial economic impact and it is well beyond the abilities of the MEA as it is currently staffed and structured to facilitate this expansion.

Given that growth is gradually tapering off in China and that India is still a vast market with unexplored potential, there is also every likelihood different Chinese provincial enterprises and governments will compete for Indian contracts. If Indian central and state governments were take a leaf out of the Chinese playbook in the 1980s and 1990s, then, they can also force prices down and ensure technology transfers in addition to not repeating Chinese mistakes by ensuring strict legal and quality standards.

Indian national security interests involving Chinese provincial companies might also be substantially reduced if the commercial stakes are high – even SOEs have bottom-lines to worry about as at least the case of Indian PSUs such as ONGC shows. Their resistance to acting solely as representatives of their central government will be high if they see their business interests are being affected. It also follows then that the onus will be on New Delhi and the state capitals to see how incentives can be structured in a manner that national security can also be enhanced. Clearly, the old way of simply blocking Chinese investments will not work anymore.